Texas Multifamily Markets, Especially Austin, Show Their Strength

Dees Stribling, Contributing Editor

Austin–The recession hasn’t hit the central Texas city of Austin quite as hard as in most other places, and for the metro Austin apartment market, that means better times ahead. The reason, according to latest report on the market by investment specialist Marcus & Millichap, is that the dearth of funds for development means that the apartment property pipeline in the Texas capital is becoming thin indeed—but the demand for apartments is still relatively strong.

“Additions to the market will decrease roughly 70 percent in 2010, after spiking last year, facilitating absorption as companies resume hiring,” the report notes. “With employment growth gaining momentum, aided by several corporations relocating their headquarters to the region, more job seekers will migrate to Austin, fueling renter demand.”

Michael Watson, regional manager of the Austin office of Marcus & Millichap, tells MHN, “The buoyancy of the Austin market is sustainable due to Austin’s reputation for a progressive, active, opportunistic quality of life. Austin continues to be a popular lifestyle destination for relocations from all over the country.”

In terms of unemployment, Austin comes to the recovery from a relatively advantageous position. Unemployment in the market rose between June 2009 and June 2010 by 20 basis points, to 7.2 percent. That’s higher than during “normal” economic times, but it’s also well below—230 basis points below— the national unemployment rate.

Austin-area employers will add about 19,100 jobs during 2010, a 2.5 percent increase and enough to make up the damage done to the local employment pool in 2009, when 18,400 jobs were lost. Some 10,340 apartments came on line in metro Austin during 2009, representing the last wave of pre-2008 financing. Only 2,860 will be completed in 2010, a scant 1.8 percent increase in the stock of apartments in the market.

The upshot of these trends for apartment owners in Austin is a fall in vacancy rates this year—down 110 basis points to 9 percent by the end of 2010, according to Marcus & Millichap. Landlords ought to be able, on average, to claim effective rents of $783 per month by the end of 2010, an increase of 3.4 percent, which restores the losses experienced in 2009.

Cap rates for apartment properties in Austin have stabilized, the report adds. “More institutions are competing for the few top-tier complexes listed in densely populated communities, outbidding large, private buyers who have re-surfaced in search of Class A and Class B deals. Consequently, some high-net-worth investors have acquired mid- and lower-tier assets with value-add potential,” it says.

Marcus & Millichap also recently released reports on two other major Texas apartment markets, metro Dallas-Fort Worth and metro Houston. As in Austin, job growth has resumed in the DFW metroplex. Coupled with a modest new apartment pipeline, that trend should improve fundamentals in the market during the rest of 2010. Vacancies will be down by 90 basis points by the end of the year, and effective rents are expected to tick up 1.5 percent.

Metro Houston has its own set of unique problems that could affect the apartment market adversely in the coming months. “The drilling moratorium in the Gulf of Mexico as a result of the Deepwater Horizon oil spill remains a near-term risk that could result in the loss of thousands of local positions,” the Marcus & Millichap report notes. “In fact, some Houston-based drillers have begun developing plans to move workers and equipment out of the Gulf region due to continuing uncertainty.”

Still, barring the worst-case scenario in the oil drilling industry, metro Houston will see a modest decline in apartment vacancy rates, down 20 basis points to 12.1 percent. Effective rents will bump to by 3.6 percent.